Blog

Amazon for travel as a disruptor of LCC business model

Posted on: 12 Sep 2017

Author: Marko Javonrik, General Manager

INTRODUCTION

My recent visit to Aviation Festival in London convinced me again that airlines now understand the importance of digital technology to their business. There is no C-level presentation anymore without citing digital as a strategic priority. However, when it comes to the next level of detail, the clarity disappears. It is obvious that digital technology brings non-linear changes which are simply not understood well by many of the players in the airline space. Humans are simply not very good at dealing with non-linear thinking.

I assume much confusion also arises from the fact that digital technology plays a dual role: on the one hand it is the enabler of Low-Cost Carrier (LCC) business model and will help them put even more pressure on Full Service Carriers (FSC). On the other hand, digital technology will also disrupt LCCs and force them to change rapidly. In this blog article, I will discuss both views to hopefully bring some more clarity to the matter.

DIGITAL TECHNOLOGY AS THE ENABLER OF LCCS

In 1997, Harvard professor Clayton Christensen published a famous book The Innovator’s Dilemma. This book explains the concept behind why and how LCCs disrupted FSCs very well. This is happening in every industry all the time. Incumbents in their search for increasing profits are focusing on new innovation around their existing business model. Sooner or later, this brings them to a state where they deliver product performance beyond the needs of the mainstream market. This is then recognized as an opportunity by some start-ups, who start addressing the least demanding niche of the market. In the case of airlines, these start-ups came out as LCCs. Exactly as the book says, the incumbents (FSCs) initially ridiculed these players and thought they would not represent a threat at all. However, as LCCs become more successful, they also improved their product and at one point they reached the level that served the needs of the mainstream market. It seems that with digital technology this point has been reached and FSCs are clearly not laughing anymore.

I can take my own experience for reference. While I have used LCCs consistently for my family leisure trips for over a decade, I have still used FSCs for most of my business trip even until 3-4 years ago. This has changed dramatically in a very short time. This year, more than 50% of my business flights will be with LCCs. This is largely the result of the following:

LCCs are more flexible – I can buy just one leg of the trip at the time, which suites me perfectly because I have a very flexible schedule.

The flights metasearch engines like Skyscanner and Momondo make it extremely easy to find flights.

I started buying LCC tickets myself because it is so efficient and simple to do so using the new mobile apps. It takes me less effort and time to buy the ticket myself than it would for me to type a message to our shared services.

LCCs are growing and improving the flight coverage which accelerates the loop.

In brief: LCCs are good enough for most of my journeys, particularly the flights that take an hour or two. Digital technology has closed the gap so that LCCs now work well for me. The exact same thing is happening with hotels as Booking.com, HRS and Airbnb became my favourite hotel chains. And on every trip, I see evidence that there are more and more people who think like me.

DIGITAL TECHNOLOGY AS A DISRUPTOR OF LCCS

Digital technology now makes it possible for anyone to easily search for flights and buy plane tickets on the go. This means that users can find airline brands which they would not even consider before. They can also easily find flights from nearby airports that would not have been their first choice. This all works heavily in the favour of LCCs, which often fly from secondary airports and nearly always win on the price.

However, all of this comes with a price. The flight meta-search engines start diluting airline brands and take over some very important customer touch-points. This makes the airline market even more commoditized and the pressure on margins becomes even greater. We can see this clearly in the trend of the average flight ticket price and also in the fact that airlines are struggling to make a healthy margin despite the fact that fuel costs are currently in their favour.

With this in mind, airlines should clearly understand that just investing in more digital technology will not work. The current business model for all airlines is quickly losing its market value. And while this is currently more obvious for FSCs, soon LCCs will be in the exact same position, maybe even worse. Even the best technology solutions cannot bring back the value that is simply not there in the current business model.

Bottom line: the only way forward for LCCs is to disrupt themselves (or better – reinvent themselves) and change their business model.

Graphics: LCCs are disrupting FSCs. Digital technology is a key tool that brings them above the “Market Needs” threshold so that they become the mainstream market. However, at the same time the next disruption is already fully under way.

AMAZON FOR TRAVEL: FIGHT THE POWER OF DIGITAL PLATFORMS WITH A DIGITAL PLATFORM

All airlines are facing a threat from the digital platforms that are starting to dilute their brands and commoditize the market. This is happening across all industries and for now, there is no proven technology or business model that would stop this – there are only ways to make it more difficult and prolong the fight. However, airlines do have some significant advantages over the digital technology start-ups that are trying to aggregate them. Airlines are the enablers of an immense travelling ecosystem and have the unique opportunity to create new value there. Instead of fighting a losing battle with start-ups, perhaps the right way forward is to use the same »power« as these companies are using. However, it is important to note that to be successful, airlines need to be realistic in terms of what they are and what they are not. There are many ways forward, but pretending that your great new user experience will make people not want to use the meta-search engines is certainly not a viable option.

The consequence of the above statement is significant: if airlines want to claim their fair share of the value in the digital platform economy, they need to reinvent themselves and become something very different than what they are today.

The first airline in the world that figured out that it needs to reinvent itself to be successful in the future is Ryanair. Few years ago, Michael O’Leary came up with a bold vision: in the future, Ryanair will be the Amazon for Travel. It will be a digital platform with an airline attached to it. Since Michael O’Leary is known for provocative statements, many thought that there is no substance behind these words. However, it is becoming more and more obvious that Ryanair simply understood before other market players that the future value of their existing business model is limited and that significant growth is actually hidden in a very non-linear strategy.

CONCLUSION

Digital technology is disrupting all industries and airlines are no exception. In every single case the leaders of the past are now facing digital technology start-ups that are eating their share of the value. Choosing to ignore this fact and continuing to compete only with other airlines will be a losing strategy. The only reasonable way forward is to have a two-fold strategy: continue improving as an airline while at the same time reinventing yourself to become a digital platform company as well. Amazon for Travel is exactly that. I am not implying all airlines should copy Ryanair (in fact, they should not), but I do believe most of them will need to conceptually do the same exercise and find a digital strategy to survive the commoditization of their core market.